The economic impact of the coronavirus combined with
the associated policy responses is likely to result in a higher-than-average
number of sovereign rating actions in 2020, and a more pronounced downward bias
in sovereign rating changes than in any year since the aftermath of the global
financial crisis in 2009, Fitch Ratings says. Sovereigns' fiscal records will
be one component of our assessment of the credit impact of supplementary fiscal
measures. The intent will be to evaluate whether temporary - and in many cases,
urgent - fiscal measures introduced to counter the impact of the coronavirus
will have public finance implications that last through the medium term.

Global economic policymakers face an unprecedented
combination of challenges including a health crisis, economic disruption,
severe financial market dislocation, changes in investor sentiment,
exchange-rate volatility and a commodity price shock. One of the primary
economic consequences for regions and countries affected by coronavirus is 'sudden
stops' in activities.

Traditional macroeconomic policies will have limited
effects on curtailments motivated by health concerns, but can have a role in
softening the consequent impact on household and corporate income streams,
preventing a more marked and extended economic decline. Fitch expects that,
over time, fiscal policy responses will come to match those already underway on
the monetary side, at least in terms of the number of countries engaged.

The relationship between changes in fiscal positions
and changes in sovereign ratings is well-established. Fitch measures and
compares sovereign public finances by considering fiscal balances relative to
GDP, government debt stocks relative to GDP, interest payments as a share of
government revenue and shares of government debt denominated in foreign
currency. We create individual sovereign scores on this basis. The sum of the
changes in these scores is strongly correlated with global sovereign rating
changes, implying that a period of fiscal weakness ahead will be accompanied by
sovereign rating downgrades.

In the current environment, Fitch will continue to
assess fiscal initiatives in terms of their medium-term effect on credit
fundamentals. In developed market (DM) sovereigns, automatic stabilisers
associated with a slowdown in economic growth or a recession are inherently
cyclical, and thus of less rating influence. Instead, our focus will be on
supplementary measures including much-needed support to households, businesses
and economic sectors hit hardest by the economic decline.

With the probability of a large number of
supplementary fiscal measures being adopted across a wide range of DMs,
judgements on whether such measures should affect ratings will be guided in
part by sovereigns' records of fiscal consolidation during more favourable
economic times.

Automatic stabilisers are a less common feature of
emerging-market (EM) public finances, as social safety nets are typically less
developed. Fiscal performance is still affected by economic cycles, however,
with revenue strongly influenced by GDP growth. Fitch will apply the same
analytical framework in assessing specific coronavirus countermeasures that are
intended to be temporary, in judging whether they will affect medium-term
fiscal performance.

EM fiscal conditions are often subject to an
additional set of cyclical variations, such as changes in commodity prices,
exchange rates and global funding conditions. All of these factors are
currently evident, and will also be part of our ongoing sovereign rating review
processes. They make EM public finances more volatile, both in terms of
revenues and expenditures, and that too is expected in the period ahead.

This website makes use of cookies to maximise functionality and improve your experience on the website.By continuing to use this website, you consent to the use of cookies in accordance with Proshare's Cookie Policy. For more information on cookies and how to make choices regarding them, see our Privacy Policy. I Understand. Got It .